OneMain Holdings (NYSE:OMF) is an online lending company that has a super high dividend yield — over 7% — it can sustain through earnings. In addition, the company is buying back large amounts of its stock in the public market. So it turns out OMF stock is a rare find for investors — a sustainable high yield stock whose management is shareholder-friendly.
As a result, investors in this unique find should expect to see this stock rise quite substantially over the next year. In fact, at a minimum, they should be able to see it hit $66.55 per share, or 25% over yesterday’s price of $53.47.
This is after the stock reached a peak of $61.74 in mid-July 2021 and a near-term recent peak of $60.29 on Oct. 20. In other words, investors in OMF stock have good reason to believe it could reach its former highs.
What Lies Ahead for OneMain Holdings
OneMain just announced its financial results for the fourth quarter on Feb. 2. One of the main points in the stellar earnings release was that management raised the quarterly dividend by 36% to 95 cents per share. That implies an annual payment of $3.80 per share to investors.
Therefore, given that OMF stock traded for $53.47 as of Feb. 16, its dividend yield is 7.11% going forward. Any kind of dividend yield over 7% is very impressive for stock market investors these days.
But even more impressive is the fact that OneMain can clearly afford this dividend payment. For example, its Q4 earnings per share (EPS) was an impressive $2.02. This more than covers the 95 cents dividend per share (DPS).
In addition, analysts now project OMF Holdings will make $8.66 this year and $9.07 EPS next year, according to Seeking Alpha‘s survey of 15 analysts. This, again, more than twice covers the $3.80 DPS payment the company is on track to make. In fact, given the increase in earnings, we can probably expect DPS to rise next year.
Strong Earnings and Net Interest Spread
The company’s strong and consistent earnings are driven by its Consumer and Insurance (C&I) segment. OneMain both generates and acquires loan receivables. It sells off a good deal of those loan receivables at a profit, but also makes money by servicing those loans.
This is a very consistent and strong business. Most of its loans have very high-interest rates. Its spread on those loans is also very high.
For example, during the quarter, OneMain made $1.1 billion in interest income, but its interest expense was only $235 million. Even after deducting 237 million in receivable losses, its net operating income from lending was $649 million.
That represents 82.8% of its total income for the quarter, which is very strong and consistent for the company.
Why OMF Holdings Is Dirt Cheap
One thing is very clear now: OMF stock is dirt cheap. For example, at $53.47, its forward price-to-earnings multiple is only 6.2 times this year’s EPS of $8.66 and just 5.9 times next year’s EPS forecast of $9.07.
There is only one real, rational explanation for this situation. The market must be worried the U.S. economy is headed for a severe recession. Usually, with economic downturns, people can’t pay down their high-interest coupon loans.
There is some validity to these concerns. For example, the Federal Reserve has already made it clear it is ready to start raising interest rates in March or possibly even earlier.
However, consider if the implied destruction of its earnings base — which is probably more than 50% of today’s price — is realistic. Right now, I suspect the market has overdone its concerns.
Moreover, the dividend yield at this level is probably unsustainable.
What OMF Stock Is Worth
Morningstar shows that in the trailing 12 months (TTM), the average dividend yield has been 5.71%. If we divide the ongoing DPS of $3.80 by 5.71%, we get a target price of $66.55 per share. That is almost 25% over yesterday’s price.
This assumes the company will be able to continue paying out the $3.80 DPS based on its earnings going forward. Certainly, management and the board thinks it will be able to — otherwise, they would not have raised the quarterly dividend.
On top of this, OneMain is now buying back large amounts of shares. In the last quarter alone, it repurchased 3.7 million shares for $192 million. If that were to continue over the next three quarters, it would total $768 million in buybacks. That represents an astounding 11.3% of its total market value of $6.815 billion.
In other words, the dividend yield is 7.1% and the buyback yield is 11.3%. That gives OMF stock a huge total yield of more than 18% for shareholders.
This also coincides with my estimate that OMF stock could rise 25% over the next year. So, unless you think the U.S. economy is headed for a severe recession, this stock looks like a good value for most investors.
On the date of publication, Mark R. Hake did not hold any position (either directly or indirectly) in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.